A home loan has certain components towards which a borrower makes payment to discharge his or her home loan liability. These components are the principal amount and the interest payable which add up to make the amount payable on an installment basis by the borrower towards the repayment of the loan. This amount payable is called Equated Monthly Instalment(EMI).
Before selecting a lending option, a borrower needs to examine the options on offer and weigh the benefits and drawbacks of each option to determine which option is favourable to him and her. S/he also has to estimate approximately his or her monthly outlays under the prospective option to understand the nature of payments to be made and form a financial plan for it.
EMIs paid on a periodic basis may turn into a serious financial drain if the borrower seizes an option without thought. It is only after gathering all the required information and analysis of such information that the borrower needs to make his decision. This article seeks to explain to you the concept of EMI and how to calculate the Equated Monthly Instalment amount.
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What is EMI for home loans?
An EMI stands for Equated Monthly Instalment. A home loan borrower who has availed a home loan needs to discharge his or her liability by making monthly payments to repay the loan amount within a stipulated loan tenure. These monthly payments are called Equated Monthly Instalment.
- An Equated Monthly Instalment contains certain components that are needed for the calculation of the monthly EMI.
- These components are:
- Principal amount: This the amount of loan that a borrower avails from the lender. It is this amount that needs to be repaid and forms a significant portion of the monthly EMIs. It is directly proportional to the value of Equated Monthly Instalment. Higher the principal amount, the higher the Equated Monthly Instalment.
- Interest component: This is the amount payable by a borrower above the repayment of the principal loan amount, a rate of interest given to the lender. The interest component is also directly proportional to the value of Equated Monthly Instalment.
- Loan tenure: This is the stipulated period of time in which the borrower repays the loan. Unlike the other two components, this is inversely proportional to the value of Equated Monthly Instalment for longer the loan tenure, cheaper is the value of Equated Monthly Instalment and vice versa.
How do you calculate Equated Monthly Instalment on a home loan?
There is a mathematical formula for calculating the EMI where:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
P= Principal amount
N=Number of monthly instalments
R= Rate of Interest per month, thus, if the rate of interest per annum is 10%, R=10/(12 x 100).
This formula is the “offline” method of calculating Equated Monthly Instalment on a home loan and there are online methods also. This involves visiting some online sites like Bajaj Finserv (Home Loan EMI Calculator – Calculate Home Loan EMI & Interest), Paisabazaar(www.paisabazaar.com), HDFC Bank (Home Loan EMI Calculator | EMI Calculator | Calculate EMI for Housing Loan). These sites have Equated Monthly Instalment calculators that simply require the entering of the required variables to calculate the value of the Equated Monthly Instalment.
What is Equated Monthly Instalment for a Rs 20 lakhs home loan?
If the principal home loan amount is Rs. 20 lakhs, let us assume the rate of interest to be 10% for simplicity and the tenure to be 10 years. Now go to this site Home Loan EMI Calculator | EMI Calculator | Calculate EMI for Housing Loan and enter the required details. You will see the answer immediately on the right. The answer, in this case, is given to be Rs 26430 per month towards the repayment of the loan. This payment has to be made every month for 10 years. You will notice that if the tenure is increased to more than 10 years, the Equated Monthly Instalment value decreases.
What is the value of Equated Monthly Instalment for a Rs 12 lakhs home loan?
If you want to calculate your monthly Equated Monthly Instalment calculation for Rs 12 lakhs loan amount, then you can visit the site Home Loan EMI Calculator | EMI Calculator | Calculate EMI for Housing Loan. This site has an Equated Monthly Instalment calculator that allows you to simply enter the variables and the calculation is done online with an immediate answer available to you. You will see the answer on the right.
For instance, if the loan amount is Rs. 12 lakhs, the interest rate is taken to be 7.5% and the tenure is taken to be 15 years. After entering these variables, you are immediately presented with an answer. In this case, the answer is Rs. 11,124 per month for 15 years.
The Equated Monthly Instalment is the monthly payment made by a borrower towards the repayment of the loan amount. A home loan borrower has to make these payments within the stipulated period of time which is called the loan tenure. Equated Monthly Instalment consists of the principal amount and interest component as its monetary components which have to be paid over the loan tenure. Since the value of the Equated Monthly Instalment is affected by these components either directly or indirectly, the borrower needs to examine these components carefully.
The Equated Monthly Instalment calculation need not be a trying process because there are several websites that have online Equated Monthly Instalment calculation calculators. All you need to do is visit the website and enter the required variables to find out the EMIs payable. This allows you to estimate your potential EMIs outflows if you were to avail a home loan with a particular amount at a determined interest rate and for a certain stipulated loan tenure.
If you successfully estimate your Equated Monthly Instalmentoutflows for the loan amount, it allows you to plan your financial activity which can result in financial savings and effective discharge of your loan liability. Thus, when it comes to EMIs, estimate your potential outflows and examine the components before selecting your home loan option.